Gold and Silver Tumble as Dollar Rises on Irish Crisis

By: Adrian_Ash

THE PRICE OF GOLD gave back the last of this week's move to new Dollar and Sterling record-highs in London trade on Friday, but held nearly 1.8% stronger for Eurozone investors as the Irish debt crisis forced a joint statement from European leaders attending the G20 summit in Seoul.

US stock markets opened the day 0.5% lower – and broad commodity markets fell over 1.5% – as rumors spread of a possible tightening in Chinese interest rates following yesterday's stronger-than-expected consumer price inflation figures.

Silver prices meantime fell below last Friday's finish against all major currencies, losing more than 10% from Tuesday's 30-year high above $29 per ounce.
 
Government-bond prices also fell worldwide, pushing 10-year UK gilt yields towards 3-month highs above 3.25%.

The G20 summit ended with an agreement to give emerging economies more votes in the International Monetary Fund (China moves from 6th to 3rd place), but lacked the accusation of "undervaluation" in the Chinese Yuan which the United States' delegation called for.

"The United States of America [would] never do that," said US Treasury Secretary Timothy Geithner to CNBC overnight.

"We will never weaken our currency as a tool of competitive advantage or a way to grow our economy."

Since Geithner took office, first as president of the New York Fed in 2003, and then as Treasury Secretary in 2009, the US Dollar has dropped one-third of its international trade-weighted value.

Real US interest rates – after inflation – have been negative in 44 of the 84 months he's been leading monetary or fiscal policy.

The gold price in Dollars has risen by nearly 250%.

"Given the shifts between different governments in terms of fiscal and monetary policy," says GFMS Analytics' Rhona O'Connell, writing at MineWeb, investors can expect "sustained support for gold – which, after all, thrives on uncertainty.

"Morgan Stanley economists are looking for a significant jump in Q4 US GDP, but with the Fed in printing mode the Dollar will remain under pressure...against the majority of currencies in the coming months.

"Especially since the prognosis is based on uncertain economic performance, this points to sustained interest in gold as a hedge against Dollar weakness and volatility based on vulnerability."

Morgan Stanley does caution investors now buying gold, however, over the large number of "short Dollar" positions in the currency market, O'Connell notes.

Short-sellers in the silver market were over-run and forced to buy silver – closing out their losing positions – as the price shot 53% higher from Sept. to this week's peak.

Trading volumes in London's wholesale silver bullion market last month rose almost 19% to a two-year record by value, new data from the London Bullion Market Association showed on Friday.

Gold dealing volumes were less spectacular, rising 8% by Dollar-value to the highest level since June's Greek deficit crisis hit the Euro.

"Whatever the debate within the Euro area about the future permanent crisis resolution mechanism," said a joint statement from the French, German, Italian, Spanish and UK governments today – all meeting in Seoul for the G20 summit – "we are clear that this does not apply to any outstanding debt and any program under current instruments."

Irish bond yields eased back from this morning's record 9% levels on the news, but Italian bond prices fell, pushing their yield-premium over comparable German Bunds to new all-time highs.

Germany's proposal, late last month, that bond holders should suffer some level of loss if a Eurozone state defaults on its debts was today called "unhelpful" by Irish prime minister Brian Cowen.

Dublin needs to borrow €23.5 billion next year, the National Treasury Management Agency said today, some 12% of Ireland's economic output and 14% more than 2010.

Irish banks meantime raised their borrowing from the European Central Bank to €130 billion last month, ECB data showed.

"We are monitoring the situation in Ireland on a permanent basis," said European Commission president Jose Manuel Barroso today, also in Seoul for the G20 summit.

"We have all the necessary instruments in place...in case of need."

In Asian trading early on Friday, rumors that Beijing will block foreign investment in real estate compounded fears of a weekend interest-rate hike, says one Hong Kong gold dealer, leading to a liquidation of many short-term commodity trades.

"The Shanghai gold premium," says a London dealer, "which had traded out to as much as $52 [per ounce above London prices] on Wednesday, narrowed to $9 as the Chinese market turned a heavy seller of the metals."

Volatility in global gold prices created a brief arbitrage opportunity for Indian gold investors earlier this week, according to the Economic Times.

"Big investors who purchased when prices were around 19,600 [Rupees] a tola have become sellers at 20,600," says Ashish Mundhra of Mundhra Bullion in Chennai.

Tola bars, a common unit for gold bullion in the Middle East and sub-continent, weigh 11.7 grams, a little over one-third of an ounce.

"Currently, kilo bars are available in the market at 17,000 [Rupee] discount to the bank rate" – almost 1%.

By Adrian Ash

BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

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